The degree to which financial success is correlated with talent and hard work, which is to say the degree to which money is distributed justly in our society, is a fundamental question of great importance that I don’t have the energy to tackle today.

What I do want to consider is a smaller and related question: are rich people necessarily good at personal finance? It’s a basic premise of a large segment of the personal finance literature from The Millionaire Next Door to Secrets of the Millionaire Mind through Kiyosaki’s Rich Dad series.

I got a comment to my post on Ramsey’s Step 7 that may or may not have been meant as a joke:

I don’t know why people wouldn’t take Dave Ramsey’s advice since he is a Millionaire. I’m pretty positive that you are not a Millionaire so I don’t understand why anyone would take your advice or continue to read what you have to write about Dave.

Ramsey is much richer than I am, and more talented than I in several ways. But does it follow that his advice is better? As I pointed out in my tremendously clever riposte to the comment, Alex Rodriguez is much richer than either of us. Should he host a money advice radio show after he retires from baseball?

Millionaires are actually pretty common in America. Something like 1 in 16 households are millionaire households. To put that in perspective, it’s very roughly the same as Chrysler’s market share, so spotting a millionaire should be no harder than spotting a Chrysler on the highway.

Of course, as socially mobile as we are, and we really are, America doesn’t quite work that way. Most people either know no millionaires or they know only millionaires. If this were not the case, much of the more goofy “millionaire mind” literature wouldn’t work at all. Nobody would believe the secrets dispensed in those books if they could just ask their buddy the millionaire about them.

Well, for those those of you in the no millionaires category, let me share with you a secret from the other camp. Millionaires are not particularly good at personal finance. Generally, they are talented at whatever made them rich. They are good cardiologists, venture capitalists, and consultants. There’s a particularly successful florist who lives a few doors down from me. (Landscaping to die for.)

I’m not even sure that the millionaires I know are, as a group, better than average at personal finance. Having a healthy six-figure income over an extended period means you don’t have a lot of the stress that inspires others to think carefully about their money and develop good habits.

Of course, you are more likely to become rich, or perhaps more importantly, avoid becoming poor, if you manage your finances well. The real test is how much wealth a person has acquired considering their income, something I will grudgingly admit The Millionaire Next Door gets right. But somehow, as that genre progressed and developed, the focus shifted from how people of ordinary means became very comfortable to the secrets known only to the millionaires, which you too can learn for the price of a book and/or tickets to a seminar.

I don’t think that just because a person is rich they are necessarily deserving any more than I think that just because they are deserving they are or will become rich. And being rich doesn’t imply that a person is good at personal finance any more than it implies that they have a medical license or can consistently hit Major League pitching.

The big money advice problem is that people HAVE to save and invest money, whether they like it or not.

That means that lots of people are stuck doing something that they don’t want to be doing.

So they look for shortcut approaches to figuring out what to do.

One shortcut is to assume that those with lots of money got it from following good money strategies and then to copy those strategies.

It’s better to think things through. But that’s harder. If you don’t care to be doing this stuff, the last thing you want to hear about is an approach that is even a little bit harder and a little bit more time consuming.

Classic comment, Frank. I love that millionaire is capitalized, like a proper name. Or German. There are so many different ways to look at this.

My experience with millionaires matches yours for the most part. In fact, many millionaires I know are really not millionaires, or they wouldn’t be, if they stopped working for any length of time. My experience is that most people spend what they make, if that’s $30,000 a year or $3 million. I think once you get into Oprah territory, spending like that gets difficult, though.

Could you please elaborate on the 1:16 Americans are millioaniares stat? Where did you get it? How old is it? And, I’d particularly like to know the definition of millionaire here.

I don’t tend to think of someone as a millionaire unless his/her net worth is above $2M because it always seemed to me that you’d have to have millions-plural to be a millionaire.

Then again, even if you use net worth, you have some problems with the recent housing bust. (I think some houses on my street went from nearly $1M down to a bit above $0.5M. How many folks used to be “Millionaires.”)

P.S. I’m going to pay a bit more attention to the Chryslers I see. Who owns the one in the church parking lot?

I define millionaire as having a net worth on the good side of $1M, which is the most common definition. And I am talking here of millionaire households, not individuals. I worked out the 1 in 16 thing a year or two ago, so it may be a little off, but still reasonable for the point I was making. I based it on the annual survey that Merril Lynch commissions from Cap Gemini as well as the TNS Financial Services survey. They come up with wildly different numbers, and are trying to measure the number of households with $1M in investible assets. Averaging the two, and guestimating a little, I came up with 1 in 16. Your milage may differ.

I have a goal to be a millionaire and I am closing in on that goal; or at least I was (heh heh). That may have been a big deal back in the day. The problem is this: we are getting closer and closer to the time in which being a millionaire is a necessity to maintain what I call the “Ward Cleaver lifestyle”: a suburban house with a yard, two vehicles and a retirement plan.

“I don’t know why people wouldn’t take Dave Ramsey’s advice since he is a Millionaire”

I guess this comes from the feeling that you shouldn’t take advice from someone who hasn’t lived through the thing you want advice on (e.g. its hard to take advice on child rearing from someone who never lived with and parented a child).

So for someone like Ramsey, who moved from broke to rich, I can see how someone would assume his advice is relavant to becoming rich.

I think the problem is that people forget to separate the advice based on the persons experience or research compared to the advice they’re selling. Often, people shilling their advice have good stories and make big claims, but you have to look behind the advice and see if it was selling their advice or following their advice that got them to where they are.

Dave Ramsey suggests saving up and buying a used car
I’m not sure this is good advice
My father always said buying a used car is buying someone elses problems
I owned 4 used cars and put $600 a month in savings and my car fund never got more than a $1200 balance because of all the repairs
I pay $200 a month each for 4 new cars and never have to worry about repairs for 5 to 6 years
Yes you can by a nice new car for $200 a month
With a 5 to 6 year warranty

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.